Lewis Superhero Fighting Robots Can’t Foil Robot RallyMichael P. Regan
A funny thing happened after author Michael Lewis released a book portraying high-frequency traders as a bunch of crooks: the stock of the one publicly listed speed trader has rallied. Shares of exchange companies painted as co-conspirators are up, too.
KCG Holdings Inc., created when HFT firm Getco LLC merged with automated market maker Knight Capital Group Inc., rose 3.4 percent in the three days following the launch of the book “Flash Boys” and a “60 Minutes” report on its topic. IntercontinentalExchange Group Inc., owner of the New York Stock Exchange, climbed 2.1 percent. Nasdaq OMX Group Inc. was up 0.7 percent.
So what the heck is going on here? Wasn’t Brad Katsuyama, the hero of Lewis’s book, flying into Gotham to rid the public markets of the evil robots that have been fleecing our retirement accounts, not to mention stealing old people’s medicine for fuel?
There are several plausible explanations. One of the oldest adages that every human (and robot) on Wall Street knows is “buy the rumor, sell the news,” which implies that the rumor and the news are both positives for the stock. In this case, where the much-anticipated book was expected to be critical of the industry, it could’ve been a case of sell the rumor and buy the news.
KCG shares were down 4.3 percent last week, their worst drop since September. Nasdaq shares slid 2.2 percent last week to cap a 10 percent slide since March 7. ICE shares were down 3.8 percent last week. To be sure, it was a down week for the whole market, but not that bad: the S&P 500 was only off 0.5 percent.
So it’s possible investors did what Lewis’s book accuses the robots of doing: Front-running. In this case, front-running the book itself by selling shares of companies that may be portrayed harshly. Getco didn’t take much of a beating in the book. While the exchanges didn’t come out looking great, there weren’t any smoking guns either. So reading “Flash Boys” may have eased previous concerns and people flashed back into the market to pick up those stocks at a discount.
Another explanation may be the vigorous defense of the industry put up by the human masters of the robots. University of Notre Dame Fighting Irish alumni and booster Bill O’Brien, president of Bats Global Markets Inc., put up his dukes to square off against Lewis and Katsuyama on CNBC.
Speed trader Manoj Narang gave the dynamic duo an earful on Bloomberg Television in his own subdued style with a compliment/insult combo that the book was a “compelling narrative” but “just fiction.” That may be a good review for a Danielle Steel novel, but not something Lewis is likely to put on the back cover.
There’s also an interesting data point regarding the amount of trading that goes on at Katsuyama’s five-month-old venue IEX, which bills itself as a haven from the robot predators on the other exchanges. For sure IEX is growing, but it still only trades about 18.9 million shares a day on average in a market where 6.9 billion were changing hands daily.
So while it may be time to slap the speed-trader robots on their metallic wrists, it’s clear that they will likely continue to control market liquidity absent another sweeping regulatory overall. (And the last sweeping regulatory overhaul is what brought the robots into power in the first place.)
To get back to KCG, it’s important to note that its shareholders are heavily concentrated among two firms that have been in the stock for the long haul. General Atlantic LLC and Jefferies Group Inc. combined own more than 40 percent of the company’s shares, according to data compiled by Bloomberg.
Analysts are not exactly bullish on the speed trader. It’s rated the equivalent of buy at only two firms, while there are five hold recommendations and one sell. Its average 12-month price target of $12.50 implies a 5.9 percent return from yesterday’s close.
None of the analysts who cover the stock changed their ratings or price targets after “Flash Boys” came out, according to data tracked by Bloomberg.
Maybe they’re just waiting for the movie.